D-MARKET Electronic Services & Trading(HEPS) - 2022 Q3 - Quarterly Report

Financial and Operational Highlights Q2 and H1 2022 saw strong unadjusted growth, but IAS 29 led to reported declines and wider EBITDA losses Second Quarter 2022 Highlights In Q2 2022, Hepsiburada demonstrated strong growth in user engagement with an 8.0% increase in orders and a 17.5% rise in active customers year-over-year. However, due to hyperinflation accounting (IAS 29), reported Gross Merchandise Value (GMV) decreased by 9.7% to TRY 9.6 billion, and revenue fell by 6.2%. On an unadjusted basis, GMV grew significantly by 57.3%. The company's EBITDA loss widened to TRY 593.8 million from TRY 404.3 million in Q2 2021, though it showed a sequential improvement from Q1 2022 Q2 2022 Key Metrics (YoY, IAS 29 Adjusted) | Metric | Q2 2022 | Q2 2021 | YoY Change | | :--- | :--- | :--- | :--- | | GMV | TRY 9.6 billion | TRY 10.6 billion | -9.7% | | Revenue | TRY 2,985.2 million | TRY 3,183.9 million | -6.2% | | Number of Orders | 14.1 million | 13.1 million | +8.0% | | Active Customers | 11.7 million | 9.9 million | +17.5% | | Frequency | 5.2 | 4.2 | +23.2% | | EBITDA | (TRY 593.8 million) | (TRY 404.3 million) | - | | Net Loss | (TRY 566.3 million) | (TRY 484.1 million) | - | - On an unadjusted for inflation basis, GMV grew by 57.3% to TRY 9.2 billion, and EBITDA as a percentage of GMV improved by 0.5 percentage points compared to Q2 2021[8] First Half 2022 Highlights For the first half of 2022, the company reported a 3.1% increase in inflation-adjusted GMV to TRY 19.7 billion, driven by a significant 30.7% growth in the number of orders. Revenue grew by 4.6%. On an unadjusted basis, GMV saw robust growth of 69.1%. However, EBITDA loss for the period more than doubled to TRY 1,430.2 million, and free cash flow turned negative at TRY 1,612.3 million compared to a positive flow in H1 2021 H1 2022 Key Metrics (YoY, IAS 29 Adjusted) | Metric | H1 2022 | H1 2021 | YoY Change | | :--- | :--- | :--- | :--- | | GMV | TRY 19.7 billion | TRY 19.1 billion | +3.1% | | Revenue | TRY 6,063.9 million | TRY 5,798.8 million | +4.6% | | Number of Orders | 29.1 million | 22.3 million | +30.7% | | EBITDA | (TRY 1,430.2 million) | (TRY 635.8 million) | - | | Net Loss | (TRY 1,505.9 million) | (TRY 849.9 million) | - | | Free Cash Flow | (TRY 1,612.3 million) | TRY 1,009.4 million | - | - On an unadjusted for inflation basis, GMV for the first half of 2022 grew by 69.1% to TRY 17.5 billion[8] Management Commentary and Outlook Management highlighted strong engagement and strategic initiatives, raising GMV guidance and projecting improved EBITDA margins CEO Commentary The CEO highlighted the challenging macroeconomic environment with rising inflation. Despite this, the company achieved 31% order growth in H1 2022, driven by an 18% increase in active customers and a 23% rise in order frequency. Key strategic initiatives launched include the 'Hepsiburada Premium' subscription service, which gained 200,000 members in two months, and a 'Buy Now, Pay Later' (BNPL) solution used by over 100,000 customers. The company remains focused on its path to profitability - Order growth in H1 2022 was 31%, driven by an 18% increase in active customers and a 23% increase in order frequency year-over-year[9] - Launched 'Hepsiburada Premium', a paid subscription service, which reached 200,000 members within two months of its July launch[11] - The company's Buy-Now-Pay-Later (BNPL) solution has been utilized by over 100,000 customers by the end of August[12] Financial Outlook The company raised its full-year 2022 GMV growth guidance from around 50% to approximately 60% on an unadjusted for inflation basis. It also initiated guidance for full-year 2022 EBITDA as a percentage of GMV, expecting a range of negative 3.0% to negative 2.5%, a significant improvement from negative 6.5% in 2021, signaling a strong focus on profitability - Raised full-year 2022 GMV growth guidance to around 60% (from ~50%) on an unadjusted for inflation basis[22] - Expects full-year 2022 EBITDA as a percentage of GMV to be between -3.0% and -2.5% (unadjusted for inflation), an improvement from -6.5% in 2021[22] Key Business Developments Key business developments include robust unadjusted GMV and order growth, expanded merchant base, logistics, and financial services GMV and Order Growth Unadjusted for inflation, Q2 2022 GMV grew 57.3% to TRY 9.2 billion. The growth was primarily driven by an 8% increase in order volume, supported by a 23% rise in customer order frequency. The company noted that the pass-through effect of inflation on average order value is not fully correlated, especially in non-FMCG categories, due to factors like inventory carryover and competitive dynamics - Q2 2022 order growth of 8% was driven by a 23% increase in order frequency (to 5.2) and a 17.5% increase in the active customer base (to 11.7 million)[24] - The pass-through of inflation to average order value is limited in many categories due to inventory carryover, competitive pressures, and consumers substituting for more affordable alternatives[25] Marketplace The active merchant base grew by 45.5% year-over-year to 88,700 in Q2 2022, and the number of SKUs more than doubled to 130.3 million. The share of Marketplace (3P) GMV decreased to 64% from 69% in Q2 2021, indicating a rising share of direct sales (1P) which demonstrates the adaptability of the company's hybrid business model - Active merchant base increased to 88.7 thousand in Q2 2022 from 61 thousand in Q2 2021[26] - Number of SKUs more than doubled to 130.3 million as of June 30, 2022, from 62.9 million a year prior[26] - The Marketplace (3P) share of GMV was 64% in Q2 2022, down from 69% in Q2 2021, as the share of direct sales (1P) increased[27] Logistics and Financial Services The company's logistics arm, HepsiJet, significantly expanded its role, delivering 57% of total Marketplace parcels in Q2 2022, up from 34% a year ago. In financial services, the Hepsipay wallet reached 8.0 million customers, with 39% of total GMV passing through it. The new BNPL solution, launched in Q1 2022, has already been used by over 100,000 customers - HepsiJet, the last-mile delivery service, delivered 57% of total Marketplace parcels in Q2 2022, a significant increase from 34% in Q2 2021[32] - HepsiLojistik, the fulfillment-as-a-service business, served 513 clients by the end of Q2 2022[34] - The Hepsipay wallet reached 8.0 million customers by the end of Q2 2022, processing approximately 39% of total GMV during the quarter[36] - The Buy-Now-Pay-Later (BNPL) solution, launched in Q1 2022, was used by over 100,000 customers as of the end of August 2022[38] Strategic Assets and ESG Strategic assets continued to scale, with Hepsiburada Market (on-demand grocery) expanding its retailer network, and Hepsiburada Seyahat (flight tickets) selling roughly 37,000 tickets in Q2. The company also emphasized its ESG commitments, having signed the UN Global Compact and pledged to the UN Women's Empowerment Principles, alongside launching social responsibility initiatives - Hepsiburada Market (formerly HepsiExpress) expanded its on-demand delivery ecosystem to 105 retailers[40] - Hepsiburada Seyahat sold approximately 37,000 flight tickets in Q2 2022, up from 27,000 in the previous quarter[41] - The company committed to The United Nations Women's Empowerment Principles as part of its ESG efforts[44] Hepsiburada Financial Review The financial review details IAS 29's impact on revenue, gross contribution, and expenses, leading to increased net losses and negative EBITDA Restatement of Financial Information (IAS 29) Due to Türkiye being categorized as a hyperinflationary economy, the company has applied IAS 29 to its financial statements. All figures are presented in terms of the measuring unit current as of June 30, 2022. This involves restating non-monetary items and comparative periods using a general price index, which significantly impacts year-over-year comparisons - The company applied International Accounting Standard 29 (IAS 29) for financial reporting in a hyperinflationary economy, effective for periods ending on or after June 30, 2022[3] - Financial statements are presented in the measuring unit current as of June 30, 2022. Comparative periods are also restated to this unit, and a gain or loss on the net monetary position is included in the income statement[4][50] Revenue Analysis Inflation-adjusted revenue for Q2 2022 decreased by 6.2% YoY to TRY 2,985.2 million. This was driven by declines in 1P sales (-3.3%), Marketplace revenue (-6.2%), and delivery service revenue (-32.2%). The primary reason for the decline, despite an 8% growth in order volume, was the limited pass-through of high inflation to average order values Q2 2022 Revenue Breakdown (Inflation Adjusted, YoY) | Revenue Stream | Q2 2022 (TRY million) | Q2 2021 (TRY million) | YoY Change | | :--- | :--- | :--- | :--- | | Sale of goods (1P) | 2,403.9 | 2,486.0 | -3.3% | | Marketplace revenue (3P) | 303.2 | 323.2 | -6.2% | | Delivery service revenue | 234.8 | 346.5 | -32.2% | | Total Revenue | 2,985.2 | 3,183.9 | -6.2% | - The revenue decline in 1P and 3P operations was mainly due to the limited pass-through effect of inflation on average order value[54] Gross Contribution Analysis On an inflation-adjusted basis, the gross contribution margin as a percentage of GMV declined by 2.8 percentage points to 5.0% in Q2 2022 from 7.8% in Q2 2021. This was primarily due to the revenue decline from limited inflation pass-through and a significantly higher inflation impact on the cost of inventory sold, exacerbated by higher inventory turnover days compared to the previous year Q2 Gross Contribution (Inflation Adjusted, YoY) | Metric | Q2 2022 | Q2 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Gross Contribution | TRY 475.0 million | TRY 827.8 million | -42.6% | | Gross Contribution Margin (% of GMV) | 5.0% | 7.8% | -2.8 pp | - The decline in gross contribution margin was caused by lower revenue and a higher inflation impact on cost of inventory sold, which was amplified by higher inventory turnover days in Q2 2022[59] Operating Expenses Analysis Net operating expenses as a percentage of GMV rose by 3.9 percentage points in Q2 2022. This was mainly driven by a 4.0 pp increase in cost of inventory sold (as a % of GMV) due to the IAS 29 inflation adjustment and a 1.3 pp rise in payroll expenses. These increases were partially offset by improved efficiency, leading to a 1.3 pp decrease in advertising expenses and a 1.1 pp decrease in shipping expenses as a percentage of GMV - Advertising expenses as a percentage of GMV decreased by 1.3 pp due to enhanced marketing efficiency and a focus on customer retention[61][64] - Payroll expenses as a percentage of GMV rose by 1.3 pp, driven by talent onboarding, salary increases, and higher share-based payment expenses[61][63] - Shipping and packaging expenses as a percentage of GMV declined by 1.1 pp, reflecting a decrease in the number of parcels delivered and limited price increases from delivery partners[61][65] Net Loss and EBITDA The net loss for Q2 2022 increased to TRY 566.3 million from TRY 484.1 million in Q2 2021. EBITDA was negative TRY 593.8 million, a decline from negative TRY 404.3 million in the prior year, corresponding to an EBITDA margin of -6.2% of GMV. The margin decline was driven by lower gross contribution and higher payroll costs, partially offset by efficiencies in advertising and shipping. Sequentially, the EBITDA margin improved by 2.1 percentage points from Q1 2022 - Net loss for Q2 2022 was TRY 566.3 million, an increase from a net loss of TRY 484.1 million in Q2 2021[69] - EBITDA as a percentage of GMV declined by 2.4 pp YoY to -6.2% in Q2 2022, mainly due to a lower gross contribution margin[70] - Sequentially, the EBITDA margin improved by 2.1 pp from -8.3% in Q1 2022 to -6.2% in Q2 2022, driven by better gross contribution and cost efficiencies[71] Balance Sheet and Cash Flow Analysis The company ended Q2 2022 with total cash and financial investments of approximately TRY 4.0 billion. Net working capital was negative TRY 2,025.8 million. Net cash provided by operating activities was TRY 396.7 million, a significant decrease from the prior year but a strong improvement from Q1 2022. Free cash flow was positive at TRY 184.6 million for the quarter - Capital expenditures (Capex) were TRY 212.1 million in Q2 2022, with over 60% related to capitalized employee costs for platform development[73] - Net cash provided by operating activities was TRY 396.7 million in Q2 2022, a decrease from TRY 1,376.3 million in Q2 2021 but a significant improvement from negative cash flow in Q1 2022[75] - Free cash flow was positive at TRY 184.6 million in Q2 2022, compared to positive TRY 1,299.8 million in Q2 2021[77] - Total cash and cash equivalents stood at TRY 2,685.9 million, with an additional TRY 1,338.8 million in financial investments as of June 30, 2022[79][80] Additional Information Recent developments include significant amendments to the Turkish E-commerce Law and a planned CEO transition Regulatory Changes The Turkish Parliament approved amendments to the E-commerce Law in July 2022, aimed at preventing unfair competition. Key provisions, effective on various dates starting January 1, 2023, include limits on advertising spend, restrictions on providing financial services, a ban on private label products, and new licensing requirements for large e-commerce platforms - An amendment to the Turkish E-commerce Law was approved on July 1, 2022, to prevent unfair competition and monopolistic practices[83] - New regulations include limits on advertising expenditures (effective Jan 1, 2023), restrictions on financial services (effective Jan 1, 2024), and a ban on private label products (effective Jan 1, 2024)[84] Management Changes Hepsiburada announced a CEO transition. Murat Emirdag will step down for personal reasons effective January 1, 2023, and will be succeeded by Nilhan Onal. Ms. Onal joins from Amazon Europe, where she held several senior leadership roles. Mr. Emirdag will remain on the board as a non-executive director - CEO Murat Emirdag will step down as of January 1, 2023, and will transition to a non-executive director role on the board[87] - Nilhan Onal, formerly of Amazon Europe and Procter & Gamble, has been appointed as the new CEO, effective January 1, 2023[87][88] Consolidated Financial Statements The consolidated financial statements summarize the balance sheet, comprehensive loss, and cash flow positions under IAS 29 Consolidated Balance Sheets The unaudited consolidated balance sheet as of June 30, 2022, shows total assets of TRY 8.33 billion and total equity of TRY 2.68 billion. Key current assets include TRY 2.69 billion in cash and cash equivalents and TRY 2.23 billion in inventories. Key current liabilities include TRY 4.21 billion in trade payables and payables to merchants Consolidated Balance Sheet Highlights (As of June 30, 2022) | Account | Amount (TRY thousands) | | :--- | :--- | | Total Assets | 8,328,060 | | Cash and cash equivalents | 2,685,882 | | Inventories | 2,227,251 | | Total Liabilities | 5,648,489 | | Trade payables and payables to merchants | 4,213,224 | | Total Equity | 2,679,571 | Consolidated Statements of Comprehensive Loss The unaudited consolidated statement of comprehensive loss for the three months ended June 30, 2022, reports total revenues of TRY 2.99 billion and a net loss for the period of TRY 566.3 million. For the six months ended June 30, 2022, revenues were TRY 6.06 billion with a net loss of TRY 1.51 billion Statement of Comprehensive Loss Summary (Unaudited) | Period | Revenues (TRY thousands) | Net Loss (TRY thousands) | | :--- | :--- | :--- | | Three Months Ended June 30, 2022 | 2,985,245 | (566,283) | | Six Months Ended June 30, 2022 | 6,063,868 | (1,505,900) | Consolidated Statements of Cash Flows For the six months ended June 30, 2022, the company reported net cash used in operating activities of TRY 1.28 billion. Net cash used in investing activities was TRY 361.4 million, and net cash used in financing activities was TRY 292.3 million. This resulted in a net decrease in cash and cash equivalents for the period Cash Flow Summary (Six Months Ended June 30, 2022) | Cash Flow Activity | Amount (TRY thousands) | | :--- | :--- | | Net cash (used in)/provided by operating activities | (1,279,262) | | Net cash used in investing activities | (361,381) | | Net cash used in financing activities | (292,341) | | Net (decrease)/increase in cash and cash equivalents | (1,932,984) | Non-IFRS Financial Measures and Definitions This section defines non-IFRS measures like EBITDA and Free Cash Flow, providing their reconciliations and key operational metric definitions Use of Non-IFRS Financial Measures The company uses non-IFRS measures such as EBITDA, Free Cash Flow, and Net Working Capital to monitor underlying business performance. The report provides definitions for these metrics and reconciles them to the most directly comparable IFRS measures. For example, EBITDA is reconciled from net loss, and Free Cash Flow is reconciled from net cash provided by operating activities - EBITDA is defined as profit or loss plus taxation, net financial expenses, depreciation, and amortization[102] - Free Cash Flow is defined as net cash from operating activities less capital expenditures plus proceeds from the sale of property and equipment[102] Q2 2022 EBITDA Reconciliation (TRY million) | Line Item | Amount | | :--- | :--- | | Net loss for the period | (566.3) | | Taxation on income | - | | Financial income | 518.1 | | Financial expenses | (413.2) | | Depreciation and amortization | (101.6) | | Monetary gains/(losses) | 24.2 | | EBITDA | (593.8) | Certain Definitions This section defines key operating performance indicators used by management. Definitions are provided for GMV (gross merchandise value), Active Customer (a user who purchased in the last 12 months), Frequency (average orders per active customer), and Active Merchant (a merchant who sold at least one item in the last 12 months) - GMV (Gross Merchandise Value) is the total value of orders sold through the platform, including VAT and shipping fees, before returns and cancellations[117] - Active Customer is defined as a user who purchased an item within the preceding 12-month period[117]